The Canadian investors are confused and riven with internal conflict over market volatility, according to a new study.
A report by Natixis Investment Managers titled “Out of the Chaos and into Conflict” revealed that while 84% said they would opt for safety over performance, investors still expect annual returns of 9.1%, a rate that advisors believe is unrealistic.
The clear unease at the markets stems in part from the seismic shock of the 2008 financial crisis, with half of those polled believing they are exposed to greater risk than they were before the crash.
In addition, 66% said it was tougher now to get ahead financially with most (59%) blaming volatility for undermining their ability to reach savings and retirement goals. Overwhelmingly, Canadians prefer safety and while the majority said they understood the risks of the current market environment, 41% are not willing to get ahead.
Dave Goodsell, executive director of the Natixis Center for Investor Insight, said the impact of 2008 was still reverberating around the brains of some investors, resulting in some “shocking” answers.
He told WP: “One in five said they wished they had stayed invested [in 2008], that’s a pretty big number of people considering. Three in 10 said they wished they had got back in sooner and the one that gets me is there’s 17% of Canadians who say they are not invested as much now as they were in 2008.
“It goes to show just how impactful and deep those lessons were felt. You talk to the behavioural economists and they are going to talk about the fact people have that bias - that if they think things are already bad, they are going to keep thinking it.”
Goodsell said that at the other end of spectrum, investors were also showing signs of recency bias,with 80% confident their portfolio is properly diversified. However, there were warning signs as six in 10 admitted they can’t identify most of the underlying investments in the funds they own, leaving them potentially unaware of overweighted exposure to certain sectors and geographies that have grown disproportionately faster than others and may need rebalancing. Just 51% of respondents said they had rebalanced their investments in the past year.
Investors like this, said Goodsell, have been used to the long bull market and don’t feel the need to worry about what’s down the road.
He said: “From a professional perspective, this is a really important time to have these conversations because individuals themselves will tell you they look at things and feel they are prepared for a market downturn.
“[But] 80% of financial advisors think the bull market has made individuals more complacent about risk - that’s the crux of the problem for advisors.”
The expectations for returns substantially above inflation talks to people’s tendency to overestimate but also a lack of understanding about the need to take on more risk with equities, maybe emerging markets and higher yields in fixed income.
Despite good conditions during the past 10 years, the good folks of Canada are happy to stay on the back foot. It’s an attitude that baffles Goodsell.
He said: “The big takeaway for me is that over the last couple of years, interest rates are at all-time lows, the markets have been at record highs and there’s been a very minimal amount of volatility on a sustained basis.
“The fundamental question I have is if that’s the case, why are 84% of people in Canada saying they prefer safety over investment portfolios.”
This number has been tracking upwards and Goodsell believes this is because the investment landscape has got more complicated. “That’s when financial advisors really earn their stripes,” he said. “They can break it down and put it into simple terms, what it means for you and what are you trying to accomplish.”
The industry needs to do a better job of explaining the difference between active and passive investing, with Goodsell believing investors have been caught in the “crossfire” of arguments from both sides.
Only 53% know that passive involves a lower fee, while 55% of investors also believe that index funds are less risky than other investments and 62% think index funds can help to minimize losses.
He said: “Both of these are fallacies. It can’t help you minimize losses because there’s no risk management built it into it and it can’t be less risky because for the most part there’s no risk management there.
“What’s interesting when you look at what they’re thinking of investment, 8 in 10 said it’s going to be important to beat the benchmark and three-quarters said they want an expert picking the next opportunities.
“Inherently, they get the value proposition of active management but I think there’s been so much emphasis on fees that maybe they are forgetting the value.
“I think that also extends to financial advisors. There’s so much focus on fees and not enough about what those fees pay for and what value you get out of that relationship.”
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